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China Readings for October 11th

"Sinocism is the Presidential Daily Brief for China hands"- Evan Osnos, New Yorker Correspondent and National Book Award Winner

Another Sidetrack for China’s Railway Reform_英文频道 Caixin Online– Plans for breaking up and marketizing China’s rail system are back on the table, but it seems there’s no rush to implement..Caixin learned from ministry sources that the ministry’s debt received special attention early this year when a central government agency commissioned a close calculation of railway debt.

One source from the group studying the books told Caixin the ministry did not have “a big problem” repaying over the past two years, but things could change within the next three years when the principal comes due on major bank loans.

“It’s expected that in 2014 or 2015, the Ministry of Railways will reach a peak in debt repayment,” the source said.

The ministry’s plan was to have revenue-generating operations come on line before loans come due. Yet lenders turned soft toward the ministry after Liu’s sacking, and big banks are no longer offering discounted rates, narrowing the ministry’s ability to raise funds.

Taiwan’s Ma Sends Message to China – WSJ.com– Taiwan President Ma Ying-jeou used the occasion of an important and politically sensitive date in Chinese history to call on China to embrace democracy, as Taiwan’s opposition ratchets up criticism of his closeness to Beijing ahead of elections early next year.Mr. Ma’s call isn’t new, but it came on the 100th anniversary of the Xinhai Revolution, when the Qing Dynasty was overthrown and China’s first republic was established.

China State Investor Boosts Stakes in Big Banks – Bloomberg– China’s state-run Central Huijin Investment Ltd. began buying shares in the nation’s four biggest banks after valuations dropped below levels reached during the global financial crisis.Central Huijin started acquiring stock in Industrial & Commercial Bank of China (1398) Ltd., China Construction Bank Corp. (939), Agricultural Bank of China Ltd. (601288) and Bank of China Ltd. (3988) yesterday, according to a statement on its website. The fund will continue with “related market operations,” it said, without providing details on how much it will invest and whether it will buy the shares in Hong Kong or Shanghai.

Putin, who will meet Chinese President Hu Jintao and counterpart Wen Jiabao on a two-day trip to Beijing that starts today, will take full control of foreign policy again after four years marked by improving ties with the U.S. under outgoing President Dmitry Medvedev.

“It’s a landmark visit that will set the nature and vector of the future foreign policy of his administration,” said Dmitry Mosyakov, head of the Southeast Asia, Australia and Oceania Center of the Moscow-based Institute of Far East Studies. “In the 1990s, Russia focused on the West while leaving Asia behind, which was a mistake. Now we see Russia turning to the East for new markets, new partners and capital.”

Li Ning raises concerns for Chinese brands – FT.com– In the latest rankings of the richest people in China, Li Ning – founder of one of the country’s most famous retail brands – has tumbled from 64 last year to 291.The decline in fortune mirrors that of the Olympic gymnast’s self-named brand, which last year had overtaken Adidas for second place in the Chinese sportswear market. At that time, the chief executive was predicting it would be a top-five global sportswear brand by the end of the decade.

Pimco Is Buying in China, Sees ‘Cheap’ Emerging-Market Equities – Businessweek– Emerging-market stocks are “cheap” and Pacific Investment Management Co. is buying in China after the nation’s shares tumbled this year, said Maria Gordon, an emerging-market equity-fund manager at Pimco.“We are definitely fishing in the more cyclically distressed areas of the market where valuations are very, very cheap,” London-based Gordon said in an interview with Sara Eisen on Bloomberg Television yesterday. “We’re selectively accumulating positions” in China, Gordon said, adding that shares of Hong Kong-based insurer AIA Group Ltd. are poised for “a lot of capital appreciation.”

China VIEs. The End Of A Flawed Strategy. An Update/Rebuttal. : China Law Blog : China Law for Business– Yesterday, co-blogger Steve Dickinson wrote a post essentially excoriating VIEs. That post went live early this morning. A few hours before our post went live, Bill Bishop (who knows as much about China’s tech industry as any human being alive) wrote a post essentially saying that those who are trashing VIEs are engaging in scare tactics and that there is little cause for worry.Bishop makes his very powerful counter-argument on his Digi-Cha blog, in a post entitled, “Bloomberg Keeps VIE Fears Alive: China Companies Evading Rule With U.S. Listings Stump Regulators.” Bishop contends that “so many powerful interests have financial stakes in VIEs that it would be career suicide or worse for a Chinese bureaucrat to destroy this structure on a wholesale basis.” We do not disagree with this statement, but we do not think it deals with the two main issues. One, the government has come out with regulations making very clear that such structures are illegal. On top of that, and as we have said all along, these regulations probably should not have even been necessary because VIEs were almost certainly already illegal under a proper reading of the various applicable laws. Having said this, however, we fully recognize that the Chinese government has in the past come out and said something was illegal and then done nothing about it. See, for instance, “China Rules Skype Illegal. Tell Me Something New,” were we predicted that the government’s making Skype “illegal” would have no real impact.

But with VIEs it is different and Bishop does not address our main point (note again that his post came before ours).

China’s Missing Children – By Charles Custer | Foreign Policy– On April 10, 2010, the Liu family was living the Chinese dream. The couple had moved to the city, rented an apartment, and were blessed with two beautiful children. They weren’t rich, but they were getting by. Like many Chinese people, they felt their lives were getting better.The next morning, strange men came to their house, grabbed their son Liu Jingjun, dragged him into a white van, and drove off. Since then, the Lius have been looking for him. They haven’t found him, but they have discovered that there are an awful lot of people just like themselves.

Since at least the 1980s, kidnapping and human trafficking have become a problem in China, and most often, the victims are children. Estimates vary on just how bad things have gotten. The Chinese government reports that fewer than 10,000 children are kidnapped each year, but the U.S. State Department says it’s closer to 20,000. Some independent estimates put the number as high as 70,000 (compared with 100 to 200 children kidnapped per year in the United States, for example).

A Post-holiday Update on VIE Chatter | China Hearsay– Don’t worry, nothing has really happened on the VIE front in the past week or so. However, the chatter over these risky corporate structures continues as lots of US investors slowly wake up and realize that many Chinese listed firms in the U.S. have fundamental flaws. Oops. That’s what due diligence is for.Anyway, I have nothing new to say, but I did want to point out a couple of new things for you VIE groupies to read. First is a lengthy Bloomberg overview of the issue. It’s generic, and therefore a decent place to start if you’re looking for a jumping-off point to the topic. Second and third are two opinion pieces, by Bill Bishop (DigiCha) and Steve Dickinson (China Law Blog), who sort of set themselves up on opposing sides of the issue.

National rejuvenation urged|Politics|chinadaily.com.cn– President Hu Jintao greets former leader Jiang Zemin during a ceremony at the Great Hall of the People in Beijing on Sunday, Oct 9, 2011, to mark the centennial of the 1911 Revolution. [China Daily]BEIJING – President Hu Jintao called on people on both sides of the Taiwan Straits to work together for national rejuvenation as the country marked the 100th anniversary on Sunday of the revolution that overthrew imperial rule.
Addressing a commemoration of the 1911 Revolution, Hu said that national rejuvenation, a cherished goal of Dr Sun Yat-sen and other revolutionaries, should be the common aspiration on both sides of the Straits.

“It wasn’t as easy as it was in 2007, when we raised our last fund, but overall we were very lucky to have our investors support us,” he said.

Broadway Comedy ‘Chinglish’ Has Fun With (Bad) Signs of the Times – WSJ.com– The new Broadway comedy “Chinglish” explores the language barriers that a U.S. businessman tries to overcome as he looks to secure a lucrative contract in China for his sign-making firm.Performed in English and Mandarin with supertitles, the play grew out of the experiences that Tony award-winning playwright David Henry Hwang had on business trips to China. On one visit to Shanghai in 2005, Mr. Hwang was taken to a brand new arts center “where everything was perfect, except for the badly translated signs,” Mr. Hwang said. “I think that was where I first saw ‘Deformed Man’s Toilet’ for ‘Handicapped Restrooms.'”

Conflict with China: Prospects, Consequences, and Strategies for Deterrence | RAND – This paper presents some scenarios that, if they were to come to pass, could result in military conflict with China over the next thirty years. The authors begin by exploring different plausible sources of conflict — whether it be the collapse of North Korea, possible dwindling relations between Taiwan and China, or other contingencies involving Japan or India. They discuss the operational implications each might present the United States and then turn to the requirements for defense and deterrence. Although China’s military capabilities lag far behind those of the United States, it has — or will gain — local superiority, first in and around Taiwan and then at greater distances. As a result, direct defense of contested assets in the region will become increasingly difficult and would likely escalate geographically or into the cyber and economic realms. Enabling capabilities and buttressing the resolve of China’s neighbors is one means for improving U.S. prospects for direct defense while reducing the necessity for escalation. In parallel to that strategy, efforts to draw China into cooperative security endeavors should be proffered. The far-reaching specter of economic mayhem that would be a consequence of any Sino-American conflict, in effect a form of mutual assured economic destruction, also acts as a powerful mutual deterrent.

Analysis: China’s military buildup: How far along is it? – Yahoo! News – China’s faster-than-expected military buildup has alarmed the United States and its Asian allies and could help the Pentagon gird against deeper defense cuts threatened in some corners of Congress.
But even though the sophistication of China’s People’s Liberation Army has exceeded U.S. military forecasts, there is a recognition within the Pentagon that some of its most-cited conventional capabilities are still in their infancy.

100 years after the Xinhai Revolution – China Media Project – To commemorate the anniversary, we have translated an interview that QQ History, the history-related section of the major Chinese web portal QQ.com, did earlier this month with Guangzhou historian Yuan Weishi (袁伟时). Some readers may remember Yuan as the writer of an article on the Boxer Rebellion that in early 2006 was one reason cited by propaganda officials for the suspension of the Freezing Point supplement of China Youth Daily.

FT Alphaville » China’s local governments dig deeper– … into a hole, that is.So, China’s Golden Week was not as great for property sales as it usually is. Sales were down 32 per cent on the previous year in 20 major cities, Bloomberg tells us. Which has prompted a big fall for some property developers and financials, dragging down the Shanghai Composite and Hang Seng.

Bloomberg Keeps VIE Fears Alive: China Companies Evading Rule With U.S. Listings Stump Regulators | DigiCha– Bloomberg is keeping variable interest entity fears alive with today’s story China Companies Evading Rule With U.S. Listings Stump Regulators. (See my September 2 post Do Most Chinese Internet Firms Have A Technically Illegal Corporate Structure? | DigiCha or September 18 post Reuters: China VIE Company Structure Under Threat | DigiCha for background.)I talked to one of the reporters for this story but ended up not being quoted. It was clear that shorts were having a lot of input. The reporters ignored my main point, which is that so many powerful interests have financial stakes in VIEs that it would be career suicide or worse for a Chinese bureaucrat to destroy this structure on a wholesale basis.

Nor did the article give proper mention to the growing belief in the Chinese press and investor community, by people who are much closer to this issue than Bloomberg reporters or China shorts, that the decision has already been made to grandfather in the public VIEs and so the talk of VIE invalidation risk for US-listed firms, especially the Internet firms like Baidu ($BIDU), Netease ($NTES), Sohu ($SOHU) et al is overblown.

Heard on the Street: Don’t Bet on Breaking China – WSJ.com– It’s too soon to start betting on the collapse of China.A shaky world economy has investors understandably nervous. For many, a hard landing for China, with GDP growth for 2012 dipping sharply below the 8% mark, has moved from outlying risk to central scenario.

One measure of bearish sentiment, the Hang Seng China Enterprises Index, has fallen 35% since the end of June.

Markets have gotten ahead of themselves. Yes, China heads into the possibility of a second global downturn with more problems than it did the first. Its main weaknesses are dependence on exports, a real-estate bubble and burgeoning public debt. All are real problems. But it has enough growth momentum and room to maneuver to make a soft landing the most likely outcome.

China Companies Evading Rule With U.S. Listings Stump Regulators – Businessweek– Bloomberg fanning the VIE fears… I talked to one of the reporters for this story but ended up not being quoted. It was clear that shorts were having a lot of input. The reporters ignored my main point, which is that so many powerful interests have financial stakes in VIEs that it would be career suicide or worse for a Chinese bureaucrat to destroy this structure on a wholesale basis.//A common corporate structure that has allowed dozens of Chinese companies to get listed on U.S. exchanges is drawing increased scrutiny from American audit regulators.

Chinese Internet companies such as Sina Corp. and Baidu Inc. have used so-called variable interest entities, or VIEs, to work around Chinese restrictions and seek foreign investors since 2000. Now, the Securities and Exchange Commission is also asking questions about the structure, said Paul Boltz, a Hong Kong-based partner at Ropes & Gray LLP, who cited comment letters the agency sent to six companies since December. Judith Burns, an SEC spokeswoman, declined to comment.

Which is the face of China’s future? – The Globe and Mail– overstates ideological differences//Some Chinese see the coming battle as critical to whether their country continues its lurching reform, or takes a dangerous step backward. “Chongqing is on the way to becoming North Korea. Guangdong is on the way to becoming Singapore,” said Yu Chen, an investigative journalist at the Guangzhou-based Southern Metropolis Daily, widely considered one of the country’s most independent newspapers.

It’s unfair, though, to lay that unflattering comparison purely at the feet of Mr. Bo. Chongqing and Guangdong are as different culturally and politically as Newfoundland and Alberta; no politician could hope to lead in either place without adapting to the local realities (as evidenced by Mr. Wang’s career – he only emerged as a leading “liberal” after arriving in Guangdong) and local bureaucracies.

But with as many as seven of the current nine members of the Standing Committee of the Politburo set to retire in the next 12 months, both men are accentuating their differences, in an apparent effort to win support from the rival wings of the Communist Party.

Alibaba Seeks Temasek Backing to Buy Stake From Yahoo – Bloomberg– Alibaba Group Holding Ltd. has talked with Singapore’s Temasek Holdings Pte about providing financing to buy the 40 percent stake in itself held by Yahoo! Inc., according to people familiar with the matter.Temasek, the state-owned investment company, may help fund an offer in return for a bigger share of privately owned Alibaba Group, said the people, who declined to be identified because the discussions are confidential. Temasek isn’t interested in owning Yahoo, one person said.

Sinopec to Acquire Canada’s Daylight Energy – Bloomberg– China Petrochemical Corp., the nation’s biggest refiner, agreed to buy Daylight Energy Ltd. (DAY) for about C$2.2 billion ($2.1 billion) to gain Canadian shale-gas reserves in the company’s largest acquisition this year.The cash offer of C$10.08 a share from China Petrochemical, known as Sinopec Group, is more than double Daylight’s closing price of C$4.59 on Oct. 7, the Calgary, Alberta-based company said in a statement yesterday.

Buying Daylight gives Sinopec Group access to more than 300,000 acres of land in areas rich with oil and natural gas in Canada, adding to the company’s expansion outside Asia after falling crude prices made valuations attractive. Sinopec Group paid $4.65 billion last year for a stake in oil-sands producer Syncrude Canada Ltd., while rival Cnooc Ltd. said July 20 it would spend $2.1 billion to acquire Opti Canada Inc.

Pamela Kyle Crossley: China’s Century-Long Identity Crisis – WSJ.com– Today the CCP condemns questions, criticisms or opposition from abroad as assaults on China’s “national sovereignty,” a reaction only possible from a government with no historical grounding in what sovereignty is. Officials, along with collaborating writers and academics, have engineered a Chinese “nationalism” that consists of odds and ends of resentment against real wrongs done to China by foreign invaders and imperialists in the past; glorification of a genuinely distinct literary, artistic and philosophical tradition of some 4,000 years’ duration; fictive narratives of political and geographical continuity of a Chinese “empire” for that same period; and circuitous claims to dominate the former Qing empire territories of Manchuria, Inner Mongolia, Xinjiang, Tibet and Taiwan.China’s national evolution in the post-imperial period is rooted in a vibrant tradition of popular opposition to tyrannical government and an openness to international cooperation, but CCP-approved history and rhetoric feverishly denies this truth. The Party wields a blunt club of undefined and amoral “nationalism” that would be dangerous to it were the club to fall from its grasp. If a future government recognizes the history of China’s transition from empire to republic, however, it could temper relationships with its own people, as well as with international friends and rivals.

Ms. Crossley is professor of modern Chinese history at Dartmouth College and author of “The Wobbling Pivot: China Since 1800” (Wiley/Blackwell, 2010).

Cracks in Beijing’s financial edifice – FT-james kynge opinion – The last time – in late 2008 – that economic peril was stalking the US and Europe, China marshalled the might of its state-directed economy and engineered a muscular rebound that led the subsequent global recovery. This time, though, Beijing is feeling a lot less muscular.
The exertion of its last effort has sapped internal resources so thoroughly that the pertinent question today is not whether China can once again guide the global economy away from the rocks but whether Beijing retains decisive control over its own economic levers.